Why Apple Could and Should Buy Nuance

By: Benzinga

Posted: 8/1/2012 9:23:00 AM

Referenced Stocks: AMZN;GOOG;MDRX;MSFT;NUAN

Apple could (and probably should) buy Nuance Communications
(NASDAQ:
NUAN
) with part of its $117 billion cash stash. Acquiring Nuance would
help it keep an interface technology lead over its smartphone and
tablet rivals.

"Nuance's market value is $6.3 billion: Even if Apple paid twice
as much, it would be a worthwhile investment," said Dealbook
columnist Andrew Ross Sorkin in his
latest
column. He added that Nuance would be a "no brainer" purchase for
Apple.

Sorkin is not the first to suggest that Apple and Nuance should
hook up. That honor goes to Apple co-founder Steve Wozniak, who
unintentionally
said in November 2010 that Apple had purchased the
speech-recognition company. He quickly clarified that he had
misspoke -- he seemed to be referring to another recent Apple
purchase.

Woz's comments at the time helped to capture the market's
attention about a potential Apple/Nuance merger.

It's a pairing that may make even more sense given the growing
importance of speech software. The divergence between the price of
the two stocks makes the deal even easier for Apple to digest.
Shares of Apple have rallied about a third since the start of the
year, while shares of Nuance have lost over 30 percent of their
value in the same period: As a result, Apple could now buy Nuance
10 times over, even with a 40% premium.

Regardless of what it had to pay, Apple can use Nuance to give
it a technology edge well into the future. Apple now holds a slight
lead with its Nuance-powered, Siri voice-based interface for the
iPhone 4S. Yet, Samsung is catching up and making inroads with its
own voice-controlled Galaxy phones, also with help from Nuance.

Samsung is already threatening to overtake Apple's lead in the
global smartphone market later this year, as consumers snatch up
Samsung models with their relatively larger screens. Apple cannot
afford to let Samsung also beat it in voice technology.

Nuance would also help Apple in its quest to enter other
consumer markets. Nuance is thought to be working on an Apple TV
product that would allow users to surf Apple's vast content
collections through voice commands.

Already, Samsung and LG are leveraging Nuance speech software in
their Internet-connected TV models. More vendors may take the
plunge ahead of the holiday season.

There are potential speech-recognition applications for TV
set-top boxes, gaming systems and even Blu-Ray players. Also, there
is the opportunity for Apple to place more computer hardware in
vehicles, using Nuance-powered voice-activated controls.

Some parts of the Nuance business would likely be divested in
any deal. It is not clear if Apple would take on the software
company's enterprise business.

There may be only slight interest in owning Nuance's mobile
service assistant, Nina. It is expected to include a software
developer kit that can be customized for different applications -
say healthcare or banking. It is expected to recognize more
industry-specific language than Apple's Siri, for instance. The
company is expected to announce Nina in the coming days.

Yet it remains unclear how Nina could help Apple sell more
hardware to enterprises.

Nuance's medical business is even more likely to be divested in
any deal. Potential buyers could include a diversified hardware
company such as IBM (NYSE:
IBM
), or perhaps a company like AllScripts (NASDAQ: ) that provides
medical records back-end systems. Nuance already provides
voice-activated transcription for AllScripts.

A deal with Nuance could provide earnings synergies. Nuance is
expected to boost EPS just 11.5% next year, short of Apple's 19%
expected growth. But gross margin estimates are 69%, far higher
than Apple's at 42.8%.

The enterprise value to EBITDA multiple -- the valuation
multiple most often used by bankers -- would be steep, at more than
20 times even without a premium. There's little getting around that
fact, even when using forward multiples, and when factoring in
business line spinoffs.

Still, Apple can certainly afford it. The company is raking in
about $1 billion a day.

With the advantages Nuance could provide, and the
ever-increasing competition, there's an argument to be made that
what Apple cannot afford is to do nothing.